Ethical investing is a style of building wealth that aligns your objectives with your core values, crafting a portfolio that reflects the kind of world you want to live in. It combines financial returns with ethical responsibility.
So, how does it work? And how can investors get started today?
What is ethical investing?
When following an ethical investing strategy, investors are choosing investments not just solely on the quality of their financials, but also on personal moral, social, or environmental principles. Rather than simply investing in a business that appears ripe for growth, ethical investors also consider the broader impact that the business will have on society, local communities, and the wider world.
There are a lot of different subsets of ethical investing, including:
- Socially responsible investing.
- Sustainable investing.
- ESG investing.
While each have their own subtle differences, they all follow the same core theme: build wealth without supporting morally dubious companies.
Often this means that ethical investors seek to exclude investing in certain sectors or industries such as tobacco, gambling, adult entertainment, oil & gas, and defence. However, there are some investors who don’t exclude but rather aim to seek out and invest in the businesses championing high moral principles, even if they operate in a traditionally non-ethical industry.
For example, someone seeking diversified exposure to the oil & gas sector but also wants to support the fight against climate change may choose to invest in a fossil fuel company that’s simultaneously investing heavily in renewable energy projects.
How does ethical investing work?
At its core, ethical investing introduces another layer of analysis on top of existing financial due diligence frameworks.
Think of it this way. Most investors ask the question, “Will this company make me money?”
An ethical investor takes things one step further and asks, “How will it make this money?”
Looking at institutional ethical investors, most investment funds use negative and positive screening.
- Negative Screening – Exclude companies and sectors that fail to meet certain ethical standards. For example, weapon manufacturers or payday lenders.
- Positive Screening – Includes companies that are demonstrating best-in-class ethical practises.
In the early days of ethical investing, definitions and standards were not codified across the market, giving rise to a practice called ‘greenwashing’.
In oversimplified terms, greenwashing is when a company claims to be following the highest moral, social, or environmental standards, but in practice does the opposite.
While not illegal, it can and has misled investors, resulting in the Financial Conduct Authority (FCA) stepping in and introducing the Sustainability Disclosure Requirement, or SDR, to crackdown on greenwashing activity in the UK stock market.
Is ethical investing profitable?
This is the question most new ethical investors ask. And the short answer is, yes, but like all investments, it’s not without risks.
A common misconception in the stock market is that to invest ethically, you have to sacrifice returns. However, for long-term investors, that doesn’t appear to be the case, with numerous studies showing that, on average, ethical investing can generate similar returns, occasionally at lower risk levels.
In fact, Morgan Stanley‘s Institute for Sustainable Investing analysed over 11,000 mutual funds and uncovered that ethical funds produced comparable returns to regular mutual funds with lower downside risk, particularly during periods of market volatility.
That said, positive investment returns are not guaranteed. And when investing in ethical funds, investors need to be aware that fund managers often charge higher fees to cover the expense of additional research in finding companies with high ethical standards.
What’s more, ethical investing also doesn’t guarantee lower risk. By excluding entire sectors like oil & gas, defence, or tobacco, a portfolio runs the risk of becoming overly concentrated in other sectors, opening the door to increased volatility.
That’s why diversification remains critical.
How to get started with ethical investing in the UK
Here’s how to take your first steps along an ethical investing journey:
- Define Your Values – Decide which industries or practices you want to support or avoid (climate, human rights, equality, etc.).
- Open A Brokerage Account – To invest in the stock market, you need access to a brokerage account that allows you to buy and sell stocks or funds. Check out our top picks for brokerage accounts in 2026.
- Pick A Stock Or Fund To Invest In – This is arguably the most time-consuming step. Find a company or fund you like the sound of and start investigating whether or not it’s a quality investment.
- Check For Greenwashing – When analysing the business or fund, look for clear SDR-compliant labelling. For example, if a fund claims to exclude weapon manufacturers but owns shares in a defence contractor, then that’s a sign to dig deeper.
- Review Regularly – Over time, your values may change, and so will the business. A once high-scoring ESG company may start to dabble in less ethically sound areas in the pursuit of growth. Review your investments on a minimum annual basis to make sure your investments are still aligned with your values.
The bottom line
Despite popular belief, ethical investing is no longer a niche pursuit for idealists. It’s now a mainstream investment strategy backed by evidence that lets everyday investors build wealth while supporting a better world.
Whether you start with a basic ESG fund inside your ISA or build a carefully crafted portfolio of individual responsible stocks, you can start aiming to build long-term wealth responsibly today.